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| CENT > SEC Filings for CENT > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Overview
Central Garden & Pet Company is a leading innovator, marketer and producer of quality branded products. We are one of the largest suppliers in the pet and lawn and garden supplies industries in the United States. The total pet industry is estimated to be approximately $36 billion in annual retail sales. We estimate the annual retail sales of the pet supplies and ultra-premium pet food markets in the categories in which we participate to be approximately $15 billion. The total lawn and garden industry in the United States is estimated to be approximately $95 billion in annual retail sales. We estimate the annual retail sales of the lawn and garden supplies markets in the categories in which we participate to be approximately $7 billion.
Our pet supplies products include products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, ultra-premium dog and cat food and treats, leashes, collars, toys, pet carriers, grooming supplies and other accessories; products for birds, small animals and specialty pets, including food, cages and habitats, toys, chews and related accessories; animal and household health and insect control products; products for fish, reptiles and other aquarium-based pets, including aquariums, furniture and lighting fixtures, pumps, filters, water conditioners, food and supplements, and information and knowledge resources; and products for horses and livestock. These products are sold under a number of brand names including AdamsTM, All-Glass Aquarium®, Altosid, AqueonTM, BioSpot ®, Breeder's Choice®, Coralife®, Farnam ®, Four Paws®, Interpet, Kaytee®, Kent Marine ®, Nylabone®, Pet Select®, Pre Strike ®, Oceanic Systems®, Super Pet®, TFHTM, ZillaTM and Zodiac®.
Our lawn and garden supplies products include proprietary and non-proprietary grass seed; wild bird feed, bird feeders, bird houses and other birding accessories; weed, grass, ant and other herbicide, insecticide and pesticide products; and decorative outdoor lifestyle and lighting products including pottery, trellises and other wood products and holiday lighting. These products are sold under a number of brand names including: AMDRO®, GKI/Bethlehem Lighting, Grant's, Ironite ®, Lilly Miller®, Matthews Four SeasonsTM, New England Pottery®, Norcal Pottery®, Pennington®, Over'n Out ®, Sevin®, The Rebels® and Smart SeedTM.
In fiscal 2008, our consolidated net sales were $1.7 billion, of which our lawn and garden segment, or Garden Products, accounted for approximately $807.6 million and our pet segment, or Pet Products, accounted for approximately $897.8 million. In fiscal 2008, our loss from operations was $324.4 million, of which Garden Products accounted for $198.2 million and Pet Products accounted for $88.2 million, before corporate expenses and eliminations of $38.0 million.
Background
We have transitioned our company to a leading marketer and producer of branded products from a traditional pet and lawn and garden supplies distributor. We made this transition because we recognized the opportunity to build a portfolio of leading brands and improve profitability by capitalizing on our knowledge of the pet and lawn and garden supplies sectors, strong relationships with retailers and nationwide sales and logistics network. Our goal was to diversify our business and improve operating margins by establishing a portfolio of leading brands. Since 1997, we have acquired numerous branded product companies and product lines, including: Wellmark and Four Paws in fiscal 1997; Kaytee Products, TFH and Pennington Seed in fiscal 1998; Norcal Pottery in fiscal 1999; AMDRO and All-Glass Aquarium in fiscal 2000; Lilly Miller in fiscal 2001; Alaska Fish Fertilizer in fiscal 2002; Kent Marine, New England Pottery, Interpet, KRB Seed Company, (dba Budd's Seed), and Energy Savers Unlimited in fiscal 2004; Pets International and Gulfstream Home & Garden in fiscal 2005; Farnam, Breeder's Choice, Tech Pac, Ironite and Shirlo in fiscal 2006 and B2E Corporation, B2E Biotech LLC and DLF Trifolium Oregon (dba "ASP Research") in fiscal 2007.
Virtually all of our sales before fiscal 1997 were derived from distributing other manufacturers' products. Since then, our branded product sales have grown to approximately $1.4 billion, or approximately 85% of total sales, in fiscal 2008. During this same period, our sales of other manufacturers' products have declined to approximately 15% of total sales, and our gross profit margins have improved from 13.6% in fiscal 1996 to 30.6% in fiscal 2008.
Recent Developments
Swap Agreement Termination
In February 2009, our $75 million pay-floating interest rate swap was terminated prior to its maturity by the counterparty in accordance with the terms of the interest rate swap agreement. As a result of this swap termination, we received cash proceeds and realized a settlement gain of $2.3 million that was recorded as an adjustment to the carrying amount of the related debt. The settlement gain is being amortized as an offset to interest expense over the remaining term of the debt, which expires February 2013.
Repurchase of Company Stock
During the quarter ended March 28, 2009, we repurchased 1,070,000 shares of our voting common stock at an aggregate cost of approximately $7.1 million, or approximately $6.66 per share, and 335,000 shares of our non-voting Class A common stock at an aggregate cost of approximately $2.1 million, or approximately $6.21 per share. During the six months ended March 28, 2009, we repurchased 1,291,925 shares of our voting common stock in the open market at an aggregate cost of approximately $8.2 million, or approximately $6.33 per share, and 847,168 shares of our non-voting Class A common stock in the open market at an aggregate cost of approximately $4.4 million, or approximately $5.27 per share.
Significant Prior Year Events
Goodwill
We account for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," and test goodwill for impairment annually, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This assessment involves the use of significant accounting judgments and estimates as to future operating results and discount rates. Changes in estimates or use of different assumptions could produce significantly different results. An impairment loss is generally recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. We use discounted cash flow analysis to estimate the fair value of our reporting units. Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all four reporting units to our total market capitalization.
In the first fiscal quarter of fiscal 2008, we recorded a non-cash charge of $400 million to recognize the impairment of goodwill and other intangible assets, comprised of $202 million relating to our Garden segment and $198 million relating to our Pet segment. This non-cash charge of $400 million reduced our net earnings for the six months ended March 29, 2008 by $290.4 million net of taxes.
Gain on Sale of Properties and Legal Settlement Proceeds
The following transactions are included in selling, general and administrative expenses in the first six months of fiscal 2008:
• In October 2007, we sold a facility for approximately $7.9 million in cash. In connection with the sale, we are leasing back the property from the purchaser for a period of approximately two years. We are accounting for the leaseback as an operating lease. We recognized a gain of approximately $3.1 million in the Pet Products segment in the first six months of fiscal 2008 and deferred approximately $1.5 million to be recognized ratably over the term of the lease.
• In December 2007, we sold a facility for approximately $5.1 million. Proceeds were comprised of cash of $1.3 million and a $3.8 million recourse note payable to us. We are leasing back the property from the purchaser and are accounting for the leaseback as an operating lease. We recognized a gain of approximately $4.6 million from this sale in the Garden Products segment in the first six months of fiscal 2008.
• In December 2007, we received approximately $5.0 million in cash related to the settlement of a legal matter that is included in Corporate.
• In December 2007, we sold the net assets of our live bird business for approximately $1.2 million in cash and recognized a loss of approximately $1.6 million in the Pet Products segment.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also establishes a framework for measuring fair value and provides for expanded disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FSP No. FAS 157-2, Effective Date of FASB Statement No. 157. FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) and will be adopted by the Company beginning in the first quarter of fiscal 2010. In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, to clarify the application of SFAS No. 157 in inactive markets for financial assets. FSP 157-3 became effective upon issuance and SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company elected to partially adopt SFAS No. 157 as of the beginning of fiscal 2009, as permitted by FSP 157-2 (see Note 2 to the condensed consolidated financial statements). The Company does not expect the adoption of the remaining provisions of SFAS No. 157 (delayed by FSP 157-2) to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which provides companies an option to report selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to provide information to assist financial statement users to understand the effect of a company's choice to use fair value on its earnings, as well as to display on the face of the balance sheet the fair value of assets and liabilities chosen by the company for fair value accounting. Additionally, SFAS No. 159 establishes presentation and disclosure requirements designed to simplify comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company adopted SFAS No. 159 as of the beginning of fiscal 2009 but elected not to record additional financial assets and liabilities at fair value. As a result, the adoption of SFAS No. 159 did not impact the Company's consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141(R) "Business Combinations," which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business. This accounting pronouncement is effective prospectively for businesses acquired by the Company in its fiscal year beginning September 27, 2009. In April 2009, the FASB issued FSP No. 141(R)-1("FSP 141(R)-1"), "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies." FSP 141(R)-1 requires an acquirer to
recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of an asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer follows the recognition criteria in FASB Statement No. 5, "Accounting for Contingencies" and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss - an interpretation of FASB Statement No. 5" to determine whether the contingency should be recognized as of the acquisition date or after it. This FSP is effective prospectively for businesses acquired by the Company in its fiscal year beginning September 27, 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51." This standard prescribes the accounting by a parent company for minority interests held by other parties in a subsidiary of the parent company. SFAS No. 160 is effective for the Company in its fiscal year beginning September 27, 2009. The Company is currently evaluating the impact of SFAS No. 160 on its consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging
Activities - an Amendment of FASB Statement 133." SFAS No. 161 enhances required
disclosures regarding derivatives and hedging activities, including enhanced
disclosures regarding how: (a) an entity uses derivative instruments;
(b) derivative instruments and related hedged items are accounted for under SFAS
No. 133, "Accounting for Derivatives and Hedging Activities;" and (c) derivative
instruments and related hedged items affect an entity's financial position,
financial performance and cash flows. SFAS No. 161 is effective for the Company
in its fiscal year beginning September 27, 2009. The Company is currently
evaluating the impact of SFAS No. 161 on its consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3 ("FSP 142-3") "Determination of the Useful Life of Intangible Assets." FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, "Goodwill and Other Intangible Assets." This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for the Company in its fiscal year beginning September 27, 2009. Early adoption is prohibited. Since this guidance will be applied prospectively, on adoption, there will be no impact to our current consolidated financial statements.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 27, 2008.
Results of Operations
Net Sales
Net sales for the three months ended March 28, 2009 decreased $8.3 million, or 1.7%, to $476.4 million from $484.7 million for the three months ended March 29, 2008 due primarily to an overall softer retail market and continued inventory level reductions by retailers. Our branded product sales decreased $5.0 million and sales of other manufacturers' products decreased $3.3 million. Pet Products' net sales declined $2.1 million, or 0.9%, to $228.8 million for the three months ended March 28, 2009 from $230.9 million in the comparable fiscal 2008 period. Pet branded product sales decreased $2.8 million and sales of other manufacturers' products increased $0.7 million from the prior year due primarily to continued softness in the aquatics category and the change in the foreign currency exchange rates for sales from our international subsidiary. Garden Products' net sales decreased $6.2 million, or 2.4%, to $247.6 million for the three months ended March 28, 2009 from $253.8 million in the comparable fiscal 2008 period. The decreased garden sales were due primarily to lower grass seed sales, in what we believe was a later start to the garden season as a result of weather conditions, as compared to the prior year quarter, partially offset by increased sales of garden chemical and control products. Garden branded product sales decreased $2.1 million and sales of other manufacturers' products decreased $4.1 million.
Gross Profit
Gross profit for the three months ended March 28, 2009 increased $0.7 million, or 0.5%, to $160.5 million from $159.8 million for the three months ended March 29, 2008. Gross profit as a percentage of net sales increased from 33.0% for the three months ended March 29, 2008 to 33.7% for the three months ended March 28, 2009. Gross profit decreased $4.2 million in Pet Products due primarily to adverse changes in product mix and, secondarily, to the segment's sales decrease. Gross profit increased $4.9 million in Garden Products due primarily to margin increases in garden chemicals and control products and wild bird feed products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $11.8 million, or 10.2%, to $103.4 million for the three months ended March 28, 2009 from $115.2 million for the three months ended March 29, 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 21.7% for the three months ended March 28, 2009, compared to 23.8% in the comparable prior year quarter. The change in selling, general and administrative expenses is discussed further below.
Selling and delivery expense decreased $5.2 million, or 9.1%, from $57.3 million for the three months ended March 29, 2008 to $52.1 million for the three months ended March 28, 2009. The decreased expense was due primarily to lower fuel costs, lower employee related costs, and consolidation within our west coast distribution operations. As a percentage of net sales, selling and delivery expense decreased to 10.9% for the current quarter from 11.8% for the prior year quarter.
Facilities expense decreased $1.0 million to $2.8 million in the quarter ended March 28, 2009 from $3.8 million for the quarter ended March 29, 2008. The decrease was due primarily to cost savings from consolidation of our west coast facilities.
Warehouse and administrative expense decreased $5.6 million to $48.5 million for the quarter ended March 28, 2009 from $54.1 million in the quarter ended March 29, 2008. The decrease was due primarily to a non-cash impairment charge of $2.0 million taken against trade credits in the prior year quarter and reduced employee related costs in the current year quarter.
Net Interest Expense
Net interest expense for the three months ended March 28, 2009 decreased $4.0 million or 42.4%, to $5.5 million from $9.5 million for the three months ended March 29, 2008. The decrease was due primarily to lower average borrowings and secondarily to lower interest rates on our floating rate debt. Our borrowing rate for the quarter was approximately 3.9% compared to 5.6% for the prior year quarter.
Other Income
Other income decreased $1.3 million from earnings of $1.2 million for the quarter ended March 29, 2008, to $0.1 million loss for the quarter ended March 28, 2009. The decrease was due primarily to income recorded in the prior year quarter for an investment no longer accounted for under the equity method of accounting.
Income Taxes
Our effective income tax rate was 34.9% for the quarter ended March 28, 2009 and 42.4% for the quarter ended March 29, 2008. The 2009 tax expense rate is lower than the statutory rate primarily as a result of a $1.1 million reduction in state valuation allowances. The 2008 tax expense rate is higher than the statutory rate primarily due to a $1.7 million increase in state valuation allowances.
Net Sales
Net sales for the six months ended March 28, 2009 decreased $29.5 million, or 3.7%, to $769.0 million from $798.5 million for the six months ended March 29, 2008. Pet Products' net sales decreased $18.0 million, or 4.2%, to $414.6 million for the six months ended March 28, 2009 from $432.6 million in the comparable fiscal 2008 period. Garden Products' net sales decreased $11.5 million, or 3.1%, to $354.4 million for the six months ended March 28, 2009 from $365.9 million in the comparable fiscal 2008 period. Our branded product sales decreased $24.1 million and sales of other manufacturers' products decreased $5.4 million. The sales decrease was primarily in our grass seed category, in what we believe to be a late start to the garden season, and in our aquatic products due to softness in the category.
Gross Profit
Gross profit for the six months ended March 28, 2009 decreased $8.1 million, or 3.2%, to $246.0 million from $254.1 million for the six months ended March 29, 2008. Pet Products' gross profit decreased $10.8 million and Garden Products' gross profit increased $2.7 million. Gross profit as a percentage of net sales increased from 31.8% for the six months ended March 29, 2008 to 32.0% for the six months ended March 29, 2008. The margin increase was due primarily to reduced input costs as the prior year period was one of continued rising grain input costs. This increase was partially offset by a decrease in pet product margin due primarily to decreased sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $8.6 million, or 4.3%, to $191.5 million for the six months ended March 28, 2009 from $200.1 million for the six months ended March 29, 2008. As a percentage of net sales, selling, general and administrative expenses decreased from 25.1% for the six months ended March 29, 2008 to 24.9% for the six months ended March 28, 2009. The decrease in selling, general and administrative expenses is discussed below.
Selling and delivery expense decreased $9.0 million, or 8.6%, from $105.1 million for the six months ended March 29, 2008 to $96.1 million for the six months ended March 28, 2009. As a percentage of net sales, selling and delivery expense decreased to 12.5% from 13.2% of net sales due primarily to lower employee related, freight and fuel related costs.
Facilities decreased $1.9 million, or 25.3%, from $7.5 million for the six months ended March 29, 2008 to $5.6 million for the six months ended March 28, 2009 due primarily to cost savings from the consolidation of our west coast distribution facilities.
Warehouse and administrative expense increased $2.3 million to $89.8 million in the six month period ended March 28, 2009. The increase was due to net gains of $9.0 million from the sale of assets and a legal settlement partially offset by a non-cash impairment charge taken against trade credits in the six month period ended March 29, 2008. Absent the net gains in the prior year period, expenses decreased due primarily to lower employee related costs.
Goodwill Impairment
We updated our analysis and evaluation of goodwill for possible impairment as of December 29, 2007. Applicable accounting standards require a comparison of the sum of the fair values of the reporting units to the current market capitalization when assessing goodwill for possible impairment. As a result, we recorded an impairment charge related to goodwill of approximately $400 million, comprised of $202 million in the Garden Products segment and $198 million in the Pet Products segment, in the first quarter of fiscal 2008.
Net Interest Expense
Net interest expense for the six months ended March 28, 2009 decreased $8.7 million, or 42.0%, to $12.0 million from $20.7 million for the six months ended March 29, 2008. The decrease was due primarily to lower interest rates on our floating rate debt and decreased average borrowings. Our borrowing rate for the six months ended March 28, 2009 was approximately 4.5% compared to 6.3% a year ago.
Other Income (Expense)
Other expense was $1.1 million for the six months ended March 28, 2009 compared to other income of $1.7 million for the six months ended March 29, 2008. The decrease was due primarily to income recorded in the prior year quarter for an investment no longer accounted for under the equity method of accounting.
Income Taxes
Our effective income tax rate was 34.1% for the six months ended March 28, 2009 compared to 26.4% for the six months ended March 29, 2008. The 2009 tax expense rate is lower than the statutory rate primarily as the result of a $1.1 million reduction in state valuation allowances. The 2008 tax benefit rate was lower than the statutory rate due primarily to the nondeductible portion of the non-cash goodwill impairment charge.
Inflation
The results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation, we believe that the effects of inflation on our operations could be significant.
Weather and Seasonality
Historically, our sales of lawn and garden products have been influenced by weather and climate conditions in the different markets we serve. Additionally, Garden Products' business has historically been highly seasonal. In fiscal 2008, approximately 63% of Garden Products' net sales and 57% of our total net sales occurred in the second and third fiscal quarters. Substantially all of Garden Products' operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.
Liquidity and Capital Resources
We have financed our growth through a combination of bank borrowings, supplier credit, internally generated funds and sales of equity and debt securities to the public.
Historically, our business has been seasonal and our working capital requirements and capital resources tracked closely to this seasonal pattern. During the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts . . .
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